A budget lets you know if you're living within your means. A budget basically keeps track of:
- The money you regularly earn (from wages, salary, interest from bank accounts, etc.) - this is called your income
- The money you regularly spend (rent, food, bills, mobile phone, etc.) - this is called your expenses
What you're left with once you subtract your expenses from your income is your "disposable income" - the money you can afford to spend on things you like, or save.
Because it helps you know how much money is left over from your income after you have paid your expenses, a budget can also help you to save for a something like a holiday, a new laptop, a car, a house or an investment portfolio.
For example, if you know that you have $100 disposable income after expenses, you know that you can either spend that money on things you want, or save it so that over time you have a lump sum of money to make larger one-off purchases.
When working out your budget, if you discover your expenses are more than your income, you need to either increase your income or reduce your spending to avoid debt.
How Do I Create a Budget?
The Victorian State Government and the Federal Government of Australia have a range of online tools to help you create a budget:
Set Realistic Goals
It's important that your budget is realistic. There's no point in aiming to save $200 a week or spend $100 on your phone plan if you don't have enough income to do it.
Here are some tips to help you set a realistic budget and stick to it:
- Don't aim too high with your goals - start with small, achievable ones that keep you motivated
- Pay your rent and utilities before spending money on anything else
- Make a list of things that need to be paid for or bought on payday and stick to it
- Before you buy stuff, shop around and compare prices
- Allow for unexpected or emergency expenses
- Ask someone to help you create and stick to your budget
- Learn to say 'NO' - if you can't afford it, don't buy it
- Give your budget some flexibility
- Include some rewards to keep you motivated
Remember that a debt doesn't have to paid back all at once. You can usually make plans with whoever you owe money to so that you can pay it off at a reasonable rate on a regular basis. Check out our how to manage debt page for more information.
How Much Money Can I Save?
If you have more money coming in than going out, then you are saving money.
A budget shows exactly where your money's coming from and where you're spending it. Your budget may also show you where you might be able to cut your spending and save more.
Reduce Your Expenses
If you want to save more money, you have to cut back on how much you spend. When you think about your next purchase, consider if it's something you really need or if it's just something you just really want.
MoneySmart's Simple Ways to Save Money page has some good advice on saving money and cutting costs.
Increase Your Income
Another way to save more money is to increase your income somehow. Some ways you could do this include:
- Taking on extra part-time work
- Doing some extra study so you can get more skills and apply for a promotion and salary increase
- Starting your own business
Why Do Budgets Often Fail?
Budgets often fail because people set unrealistic goals. You don't have to go without all the luxuries in life. In fact, if you want your budget to be successful, make sure you still give yourself the occasional treat. For example:
- If you take lunch to work, allow some money to buy lunch once a week or once a fortnight
- Don't give up going to movies - just go on the cheap nights
Working out the right budget will always take fine tuning. Sometimes you'll underestimate what things cost, or have to allow for an emergency. It's all about finding the right balance.
Once you've got a budget worked out, monitor it for a few months and then revisit it to see if you're on track. If some modifications need to be made (eg, allowing for more phone expenses), make the adjustments and see how well your revised budget goes.
If you're in financial trouble you can always talk to a financial counsellor or get some advice from a professional financial planner who can help create a budget that will work for you.
Check out the Victorian Government's MoneyHelp website for a lot of good advice about managing bills and debt. You can also call their free counselling service on 1800 149 689.
This Victorian Government website includes budgeting tools and advice about ways to manage financial debt.
The Australian Securities Investment Commission (ASIC) provides tips and advice about budgeting.